Is Silver The New Gold?

Investors are talking about gold, and why not? In the past 10 years, the price has climbed more than fivefold from less than $300 to more than $1,500 an ounce. A $10,000 investment made in June 2001 would be north of $50,000 in value today.

But guess what? Silver has actually done quite a bit better, rising from less than $5 to nearly $40 per ounce - good for about an eightfold price gain over the previous decade. So instead of the $50,000 you'd have if you bought gold, your $10,000 would now be worth around $80,000. (For more on silver, read Silver Thursday: How Two Wealthy Traders Cornered The Market.)

Considering this outperformance, it may be time to think of silver as "the new gold." Indeed, there's compelling evidence it could soon replace gold as the precious metal of choice for investors. For example, some analysts project silver prices as high as $90 an ounce by the end of 2011 - more than double current levels. Gold, however, may hover around $1,500 an ounce throughout the year, suggesting there won't be much, if any, money to be made in the yellow metal for a while.

Why Silver's HotSilver has skyrocketed for many of the same reasons as gold, a big one being widespread fear about the condition and direction of the economy. Anytime there's economic uncertainty and a risk of higher inflation, just like there is right now, precious metals become increasingly popular because of their perceived safety and reputation as strong inflation hedges.

The big advantage of silver is it's not mainly a store of value like gold. Besides offering an inflation hedge and helping to calm investors, silver has many applications in industry, medicine and dentistry thanks to its electrical and thermal conductivity, usefulness in making metal alloys and other unique properties. Commercial and industrial applications account for about 60% of silver demand each year. (To help take advantage of these increases, read Investing In The Metals Markets.)

Why It Will Get Even HotterWhereas gold might be in a cooling phase, silver could be set to soar for several reasons.

1. Industry and Investor Demand Are Set to RiseThese groups may both want to bulk up their silver holdings, but for different reasons. Whereas the pickup in hiring and other signs of economic recovery we've seen could spur higher demand from industry, investors may want more silver because they're not yet convinced the recovery is for real and still want a safe haven for their money.

2. Silver's Popular in Emerging CountriesWhile the United States and other Western economies have been struggling, China, India and many other emerging countries have been expanding by leaps and bounds. Their industries need lots of silver. Moreover, the number of investors in emerging countries is rising as those areas become more affluent, and many of those investors value precious metals like silver for the same reasons we do.

3. There's a Threat of Higher InflationSignificant inflation isn't here yet, but it could be on the way (we've all seen food and gasoline prices go up). The government has been printing billions of dollars to cover its huge debt, creating more new money in the past couple years than at any other time in U.S. history. This sets the stage for higher inflation by diluting the money supply and reducing the value of the dollar. (To learn more on how metals increase and decrease in value, check out A Beginner's Guide To Precious Metals.)

The Bottom LineThe economy is at a crossroads of sorts: There are signs of recovery, yet conditions are ripe for inflation. In this situation, silver may be a better investment than gold because there are two sources of demand - investors and industry. Gold, by contrast, is much more at the whim of investors and tends to sink or swim based on their need to feel safe. If the economy really picks up steam and investors start to feel bullish about stocks, gold could quickly become yesterday's news. (To learn more on gold and silver, see Trading The Gold-Silver Ratio.)